Explain the primary and secondary functions of commercial banks .
Answers
The main kinds of deposits are:
(i) Current Account Deposits or Demand Deposits:
These deposits refer to those deposits which are repayable by the banks on demand:
ADVERTISEMENTS:
1. Such deposits are generally maintained by businessmen with the intention of making transactions with such deposits.
2. They can be drawn upon by a cheque without any restriction.
3. Banks do not pay any interest on these accounts. Rather, banks impose service charges for running these accounts.
(ii) Fixed Deposits or Time Deposits:
Fixed deposits refer to those deposits, in which the amount is deposited with the bank for a fixed period of time.
1. Such deposits do not enjoy cheque-able facility.
2. These deposits carry a high rate of interest.
Basis
Demand Deposits
Fixed Deposits
Cheque facility
They are chequeable deposits.
They are non-chequeable deposits.
Interest payments
They do not carry any interest.
They carry interest which varies directly with the period of time.
Number of transactions
The depositor can make any number of transactions for deposit or with drawl of money.
Depositor generally makes only two transactions: (i) Deposit of Money in the beginning;
(ii) Withdrawal of money on maturity.
(iii) Saving Deposits:
These deposits combine features of both current account deposits and fixed deposits:
1. The depositors are given cheque facility to withdraw money from their account. But, some restrictions are imposed on number and amount of withdrawals, in order to discourage frequent use of saving deposits.
2.They carry a rate of interest which is less than interest rate on fixed deposits. It must be noted that Current Account deposits and saving deposits are chequable deposits, whereas, fixed deposit is a non-chequable deposit.
2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the balance is given to needy borrowers and interest is charged from them, which is the main source of income for these banks.
Different types of loans and advances made by Commercial banks are:
(i) Cash Credit:
Cash credit refers to a loan given to the borrower against his current assets like shares, stocks, bonds, etc. A credit limit is sanctioned and the amount is credited in his account. The borrower may withdraw any amount within his credit limit and interest is charged on the amount actually withdrawn.
Functions of commercial banks :-
1) Collection of Deposits - They accept deposits from their clients . The common types of deposits accepted by bank are
• Saving account deposits
• Current account deposits
• Recurring deposits
• Fixed term deposits
2) Lending of Funds - It provide loans and advances out of the money received through deposits . These advances can be made in the form of overdraft cash credit .
3) Cheque Facility - The banks collect the cheques for their customers drawn on other banks . To collect cheques banks have clearing houses .
4) Agency Functions - Bank pay insurance premium on behalf of their clients , Bank also collect divided premium , interest , pension , etc .
5) Allied Services - In addition to above functions bank also provide allied services such as bill payments , locker facilities , etc .